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EX-32.2 - CERTIFICATION - Commonwealth Income & Growth Fund VI | cigf6_ex32-2.htm |
EX-32.1 - CERTIFICATION - Commonwealth Income & Growth Fund VI | cigf6_ex32-1.htm |
EX-31.2 - CERTIFICATION - Commonwealth Income & Growth Fund VI | cigf6_ex31-2.htm |
EX-31.1 - CERTIFICATION - Commonwealth Income & Growth Fund VI | cigf6_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2020 or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number: 333-131736
COMMONWEALTH INCOME & GROWTH FUND VI
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
20-4115433
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification Number)
|
4532 US Highway 19 North
Suite 200
New Port Richey, FL 33652
(Address, including zip code, of principal executive
offices)
(877) 654-1500
(Registrant’s
telephone number including area code)
Indicate
by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (ii) has
been subject to such filing requirements for the past 90 days: YES
☒ NO ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).YES ☒ NO
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of "accelerated filer,
“large accelerated filer" and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ☐
|
Accelerated
filer ☐
|
Non-accelerated
filer ☐
|
Smaller
reporting company ☒
|
(Do not
check if a smaller reporting company.)
|
Emerging
growth company ☐
|
Indicate
by check mark whether the registrant is an emerging growth company
(as defined in Rule 12b-2 of the Exchange Act).
YES
☐ NO ☒
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). YES ☐ NO
☒
1
FORM 10-Q
JUNE 30, 2020
TABLE OF CONTENTS
PART
I
|
||
Item
1.
|
Financial
Statements
|
3
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
Item
4.
|
Controls
and Procedures
|
19
|
PART
II
|
||
Item
1.
|
Legal
Proceedings
|
20
|
Item
1A.
|
Risk
Factors
|
20
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
Item
3.
|
Defaults
Upon Senior Securities
|
23
|
Item
4.
|
Mine
Safety Disclosures
|
23
|
Item
5.
|
Other
Information
|
23
|
Item
6.
|
Exhibits
|
23
|
2
Part
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed
Balance Sheets
|
||
|
|
|
|
|
|
|
June
30,
|
December
31,
|
|
2020
|
2019
|
|
(unaudited)
|
|
ASSETS
|
|
|
Cash and cash
equivalents
|
$117,803
|
$3,624
|
Lease income
receivable, net of reserve of approximately $33,000 and
$63,000 at June 30, 2020
and December 31, 2019, respectively
|
59,483
|
108,646
|
Accounts
receivable, Commonwealth Capital Corp., net of accounts payable of
approximately $114,750 and $50,096 at June 30, 2020 and December
31, 2019, respectively
|
64,955
|
74,026
|
Other receivables,
net of reserve of approximately $13,000 at June 30, 2020 and
December 31, 2019
|
8,725
|
9,255
|
Prepaid
expenses
|
1,966
|
3,042
|
|
252,932
|
198,593
|
|
|
|
Equipment, at
cost
|
4,211,421
|
4,825,207
|
Accumulated
depreciation
|
(3,995,873)
|
(4,381,343)
|
|
215,548
|
443,864
|
Equipment
acquisition costs and deferred expenses, net of accumulated
amortization of approximately $23,000 and $32,000 at June 30,
2020 and December 31, 2019, respectively
|
6,065
|
10,328
|
|
|
|
Total
Assets
|
$474,545
|
$652,785
|
|
|
|
LIABILITIES
AND PARTNERS' CAPITAL
|
|
|
LIABILITIES
|
|
|
Accounts
payable
|
$80,752
|
$133,865
|
Accounts payable,
CIGF, Inc., net of accounts receivable of approximately $187 at
June 30, 2020 and December 31, 2019
|
127,149
|
137,577
|
Other accrued
expenses
|
14,490
|
5,059
|
Unearned lease
income
|
3,630
|
41,988
|
Notes
payable
|
92,523
|
160,453
|
|
|
|
Total
Liabilities
|
318,544
|
478,942
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
PARTNERS'
CAPITAL
|
|
|
General
Partner
|
1,000
|
1,000
|
Limited
Partners
|
155,001
|
172,843
|
Total
Partners' Capital
|
156,001
|
173,843
|
Total
Liabilities and Partners' Capital
|
$474,545
|
$652,785
|
see
accompanying notes to condensed financial statements
|
3
Commonwealth
Income & Growth Fund VI
|
||||
Condensed
Statements of Operations
|
||||
(unaudited)
|
||||
|
||||
|
Three
months ended June 30,
|
Six
months ended June 30,
|
||
|
2020
|
2019
|
2020
|
2019
|
|
|
|
|
|
Revenue
|
|
|
|
|
Lease
|
$180,332
|
$185,159
|
$341,188
|
$372,756
|
Interest and
other
|
17,768
|
53
|
17,787
|
2,554
|
Sales and property
taxes
|
4,222
|
9,402
|
15,462
|
15,229
|
Gain on sale of
equipment
|
12,737
|
125
|
46,694
|
125
|
Total
revenue and gain on sale of equipment
|
215,059
|
194,739
|
421,131
|
390,664
|
|
|
|
|
|
Expenses
|
|
|
|
|
Operating,
excluding depreciation
|
92,474
|
72,974
|
197,599
|
176,606
|
Equipment
management fee, General Partner
|
5,924
|
9,258
|
13,967
|
18,637
|
Interest
|
1,567
|
5,723
|
3,595
|
12,715
|
Depreciation
|
91,070
|
132,539
|
187,118
|
266,999
|
Amortization of
equipment acquisition costs and deferred expenses
|
2,346
|
6,076
|
5,047
|
12,938
|
Sales and property
taxes
|
4,222
|
9,402
|
15,462
|
15,229
|
Bad debt
expense
|
810
|
-
|
8,327
|
-
|
Total
expenses
|
198,413
|
235,972
|
431,115
|
503,124
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$16,646
|
$(41,233)
|
$(9,984)
|
$(112,460)
|
|
|
|
|
|
Net
income (loss) allocated to Limited Partners
|
$16,646
|
$(41,233)
|
$(9,984)
|
$(112,460)
|
|
|
|
|
|
Net
income (loss) per equivalent Limited Partnership unit
|
$0.01
|
$(0.02)
|
$(0.01)
|
$(0.06)
|
|
|
|
|
|
Weighted
average number of equivalent Limited Partnership units outstanding
during the period
|
1,741,755
|
1,744,331
|
1,742,970
|
1,744,331
|
|
|
|
|
|
see
accompanying notes to condensed financial statements
|
4
Commonwealth
Income & Growth Fund VI
|
|||||
Condensed
Statement of Partners' Capital
|
|||||
For
the six months ended June 30, 2020 and 2019
|
|||||
(unaudited)
|
|||||
|
|
|
|
|
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance,
January 1, 2020
|
50
|
1,744,254
|
$1,000
|
$172,843
|
$173,843
|
Net
loss
|
-
|
-
|
-
|
(26,630)
|
(26,630)
|
Redemptions
|
-
|
(2,500)
|
-
|
(7,858)
|
(7,858)
|
Balance,
March 31, 2020
|
50
|
1,741,754
|
$1,000
|
$138,355
|
$139,355
|
Net
income
|
-
|
-
|
-
|
16,646
|
16,646
|
Balance,
June 30, 2020
|
50
|
1,741,754
|
$1,000
|
$155,001
|
$156,001
|
|
General
|
Limited
|
|
|
|
|
Partner
|
Partner
|
General
|
Limited
|
|
|
Units
|
Units
|
Partner
|
Partners
|
Total
|
Balance, January 1, 2019
|
50
|
1,744,254
|
$1,000
|
$300,574
|
$301,574
|
Net
loss
|
-
|
-
|
-
|
(71,225)
|
(71,225)
|
Redemptions
|
-
|
-
|
-
|
-
|
-
|
Balance, March 31, 2019
|
50
|
1,744,254
|
$1,000
|
$229,349
|
$230,349
|
Net
loss
|
-
|
-
|
-
|
(41,233)
|
(41,233)
|
Redemptions
|
-
|
-
|
-
|
-
|
-
|
Balance, June 30, 2019
|
50
|
1,744,254
|
$1,000
|
$188,116
|
$189,116
|
|
|
|
|
|
|
see accompanying notes to condensed financial
statements
5
Commonwealth
Income & Growth Fund VI
|
||
Condensed
Statements of Cash Flows
|
||
(unaudited)
|
||
|
|
|
|
Six
months ended June 30,
|
|
|
2020
|
2019
|
|
|
|
Net
cash provided by operating activities
|
$34,929
|
$2
|
|
|
|
Cash
flows from investing activities
|
|
|
Capital
expenditures
|
(19,590)
|
-
|
Equipment
acquisition fees paid to General Partner
|
(784)
|
-
|
Net proceeds from
the sale of equipment
|
107,482
|
125
|
Net
cash provided by investing activities
|
87,108
|
125
|
|
|
|
Cash
flows from financing activities
|
|
|
Redemptions
|
(7,858)
|
-
|
Net
cash used in financing activities
|
(7,858)
|
-
|
|
|
|
Net
increase in cash and cash equivalents
|
114,179
|
127
|
|
|
|
Cash
and cash equivalents at beginning of the period
|
3,624
|
5,863
|
|
|
|
Cash
and cash equivalents at end of the period
|
$117,803
|
$5,990
|
|
|
|
see
accompanying notes to condensed financial statements
|
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Business
Commonwealth
Income & Growth Fund VI (“CIGF6” or the
“Partnership” or the “Fund”) is a limited
partnership organized in the Commonwealth of Pennsylvania on
January 6, 2006. The Partnership offered for sale up to 2,500,000
units of the limited partnership at the purchase price of $20 per
unit (the “offering”). The Partnership reached the
minimum amount in escrow and commenced operations on May 10, 2007.
The offering terminated on March 6, 2009 with 1,810,311 units sold
for a total of approximately $36,000,000 in limited partner
contributions.
The
Partnership used the proceeds of the offering to acquire, own and
lease various types of information technology equipment and other
similar capital equipment, which will be leased primarily to U.S.
corporations and institutions. Commonwealth Capital Corp.
(“CCC”), on behalf of the Partnership and other
affiliated partnerships, acquires equipment subject to associated
debt obligations and lease agreements and allocates a participation
in the cost, debt and lease revenue to the various partnerships
that it manages based on certain risk factors.
The
Partnership’s General Partner is Commonwealth Income &
Growth Fund, Inc. (the “General Partner”), a
Pennsylvania corporation which is an indirect wholly owned
subsidiary of CCC. CCC is a member of the Institute for Portfolio
Alternatives (“IPA”) and the Equipment Leasing and
Finance Association (“ELFA”). Approximately ten years
after the commencement of operations, the Partnership intends to
sell or otherwise dispose of all of its equipment, make final
distributions to partners, and to dissolve. The Partnership was
originally scheduled to end its operational phase on December 31,
2018. During the year ended December 31, 2018, the operational
phase was officially extended to December 31, 2021 through an
investor proxy vote. The Partnership is expected to terminate on
December 31, 2023.
Liquidity
The
General Partner elected to forgo distributions and allocations of
net income owed to it, and suspended limited partner distributions.
The General Partner will continue to reassess the funding of
limited partner distributions throughout 2020 and will continue to
waive certain fees. If available cash flow or net disposition
proceeds are insufficient to cover the Partnership expenses and
liabilities on a short and long-term basis, the Partnership may
attempt to obtain additional funds by disposing of or refinancing
equipment, or by borrowing within its permissible
limits.
2. Summary of Significant Accounting Policies
Basis of Presentation
The
financial information presented as of any date other than December
31, 2019 has been prepared from the books and records without
audit. The following unaudited condensed financial statements have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Financial information as of
December 31, 2019 has been derived from the audited financial
statements of the Partnership, but does not include all disclosures
required by generally accepted accounting principles to be included
in audited financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information for
the periods indicated, have been included. Operating results for
the six months ended June 30, 2020 are not necessarily indicative
of financial results that may be expected for the full year ended
December 31, 2020.
Adjustment to Prior Financial Statements
7
Disclosure of Fair Value Financial Instruments
Estimated
fair value was determined by management using available market
information and appropriate valuation methodologies. However,
judgment was necessary to interpret market data and develop
estimated fair value. Cash and cash equivalents, receivables,
accounts payable and accrued expenses and other liabilities are
carried at amounts which reasonably approximate their fair values
as of June 30, 2020 and December 31, 2019 due to the short-term
nature of these financial instruments.
The
Partnership’s long-term debt consists of notes payable, which
are secured by specific equipment and are nonrecourse liabilities
of the Partnership. The estimated fair value of this debt at June
30, 2020 and December 31, 2019 approximates the carrying value of
these instruments, due to the interest rates on the debt
approximating current market interest rates. The Partnership
classifies the fair value of its notes payable within Level 2 of
the valuation hierarchy based on the observable inputs used to
estimate fair value.
Cash and cash equivalents
At June
30, 2020, cash and cash equivalents were held in one account
maintained at one financial institution with an aggregate balance
of approximately $121,000. Bank accounts are federally insured up
to $250,000 by the FDIC. At June 30, 2020, the total cash balance
was as follows:
At June 30, 2020
|
Balance
|
Total
bank balance
|
$121,000
|
FDIC
insured
|
(121,000)
|
Uninsured
amount
|
$-
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit
risk. The amounts in such accounts will fluctuate throughout 2020
due to many factors, including cash receipts, equipment
acquisitions, interest rates and distributions to limited
partners.
Recent Accounting Pronouncements Not Yet Adopted
FASB issued guidance, Accounting Standards Update No.
2016-13, Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, as
clarified and amended by ASU 2018-19, Codification Improvements to
Topic 326, Financial Instruments – Credit Losses and
ASU 2019-05, Financial Instruments –
Credit Losses (Topic 326): Targeted Transition Relief,
Accounting Standards Update No.
2020-02, Financial Instruments –
Credit Losses (Topic 326) . The guidance is effective for fiscal years, within
those fiscal years, beginning after December 15, 2020 and interim
periods within fiscal years beginning after December 15, 2021. The
guidance requires an allowance for credit losses based on the
expectation of lifetime credit losses on financial receivables
carried at amortized cost, including, but not limited to, mortgage
loans, premium receivables, reinsurance receivables and certain
leases. The current expected credit loss (“CECL”)
impairment model for financial assets reported at amortized cost
will be applicable to receivables associated with sales-type and
direct financing leases but not to operating lease
receivables.
The FASB developed the guidance in response to concerns that credit
losses were identified and recorded “too little, too
late” in the period leading up to the global financial crisis
of 2008. More recently, the impact of the COVID -19 pandemic may
bring new challenges to identifying credit losses. While the new
standard is expected to have a significant effect on entities in
the financial services industry, particularly banks and others with
lending operations, the guidance affects all entities in all
industries and applies to a wide variety of financial instruments,
including trade receivables.
On November 15, 2019, the FASB delayed the effective date of FASB
ASC Topic 326 for certain small public companies and other private
companies. As amended, the effective date of ASC Topic 326 was
delayed until fiscal years beginning after December 15, 2022 for
SEC filers that are eligible to be smaller reporting companies
under the SEC’s definition, as well as private companies and
not-for-profit entities. The Partnership continues to evaluate the
impact of the new guidance on its condensed financial
statements.
8
3. Information Technology, Medical Technology, Telecommunications
Technology, Inventory Management and Other Business-Essential
Capital Equipment (“Equipment”)
The
Partnership is the lessor of equipment under leases with periods
that generally will range from 12 to 48 months. In general,
associated costs such as repairs and maintenance, insurance and
property taxes are paid by the lessee.
Gains
or losses from the sale of equipment are recognized when the lease
is modified and terminated concurrently. Gain from sale of
equipment included in lease revenue for the six months ended June
30, 2020 and 2019 was $47,000 and $0, respectively.
CCC, on behalf of the Partnership and on behalf of other affiliated
companies and partnerships (“partnerships”), acquires
equipment subject to associated debt obligations and lease
agreements and allocates a participation in the cost, debt and
lease revenue to the various companies based on certain risk
factors.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at June 30, 2020 was
approximately $2,503,000 and is included in the Partnership’s
equipment on its balance sheet. The total cost of the equipment
shared by the Partnership with other partnerships at June 30, 2020
was approximately $8,860,000. The Partnership’s share of the
outstanding debt associated with this equipment at June 30, 2020
was approximately $43,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
outstanding debt related to the equipment shared by the Partnership
at June 30, 2020 was approximately $507,000.
The
Partnership’s share of the cost of the equipment in which it
participates with other partnerships at December 31, 2019 was
approximately $2,539,000 and is included in the Partnership’s
equipment on its balance sheet. The total cost of the equipment
shared by the Partnership with other partnerships at December 31,
2019 was approximately $9,007,000. The Partnership’s share of
the outstanding debt associated with this equipment at December 31,
2019 was approximately $88,000 and is included in the
Partnership’s notes payable on its balance sheet. The total
outstanding debt related to the equipment shared by the Partnership
at December 31, 2019 was approximately $873,000.
The
following is a schedule of approximate future minimum rentals on
non-cancellable operating leases:
Periods Ended December
31,
|
Amount
|
Six months ended
December 31, 2020
|
$178,000
|
Year ended December
31, 2021
|
35,000
|
Year ended December
31, 2022
|
10,000
|
Year ended December
31, 2023
|
8,000
|
Year ended December
31, 2024
|
6,000
|
|
$237,000
|
The
Partnership is scheduled to terminate on December 31, 2023. CCC
will assume the rights to the remaining active leases and their
related remaining revenue stream through their
termination.
9
4. Related Party Transactions
Receivables/Payables
As of
June 30, 2020 and December 31, 2019, the Company’s related
party receivables and payables are short term, unsecured and
non-interest bearing.
Six months ended June 30,
|
2020
|
2019
|
|
|
|
Reimbursable expenses
|
|
|
The General Partner
and its affiliates are entitled to reimbursement by the Partnership
for the cost of goods, supplies or services obtained and used by
the General Partner in connection with the administration and
operation of the Partnership from third parties unaffiliated with
the General Partner. In addition, the General Partner and its
affiliates are entitled to reimbursement of certain expenses
incurred by the General Partner and its affiliates in connection
with the administration and operation of the Partnership. For the
six months ended June 30, 2020 and 2019, the Partnership was
charged approximately $55,000 and $52,000 in Other LP expense,
respectively.
|
$175,000
|
$143,000
|
Equipment acquisition fee
|
|
|
The General Partner
earned an equipment acquisition fee of 4% of the purchase price of
each item of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and lease thereof
or sale under a conditional sales contract.
|
$1,000
|
$-
|
Equipment management fee
|
|
|
The general partner
is entitled to be paid a monthly fee equal to the lesser of (a) the
fees which would be charged by an independent third party in the
same geographic market for similar services and equipment or (b)
the sum of (i) two percent of gross lease revenues attributable to
equipment subject to full payout net leases which contain net lease
provisions and (ii) five percent of the gross lease revenues
attributable to equipment subject to operating leases. Our general
partner, based on its experience in the equipment leasing industry
and current dealings with others in the industry, will use its
business judgment to determine if a given fee is competitive,
reasonable and customary. The amount of the fee will depend upon
the amount of equipment we manage, which in turn will depend upon
the amount we raise in this offering. Reductions in market rates
for similar services would also reduce the amount of this fee we
will receive.
|
$14,000
|
$19,000
|
|
|
|
Equipment liquidation fee
|
|
|
Also referred to as
a "resale fee." With respect to each item of equipment sold by the
general partner, we will pay a fee equal to the lesser of (i) 50%
of the competitive equipment sale commission or (ii) three percent
of the sales price of the equipment. The payment of this fee is
subordinated to the receipt by the limited partners of (i) a return
of their capital contributions and a 10% per annum cumulative
return, compounded daily, on adjusted capital contributions and
(ii) the net disposition proceeds from such sale in accordance with
the partnership agreement. Our general partner, based on its
experience in the equipment leasing industry and current dealings
with others in the industry, uses its business judgment to
determine if a given sales commission is competitive, reasonable
and customary. Such fee will be reduced to the extent any
liquidation or resale fees are paid to unaffiliated parties. The
amount of such fees will depend upon the sale price of equipment
sold. Sale prices will vary depending upon the type, age and
condition of equipment sold. The shorter the terms of our leases,
the more often we may sell equipment, which will increase
liquidation fees we receive.
|
$4,000
|
$-
|
|
|
|
10
5. Notes Payable
Notes
payable consisted of the following approximate
amounts:
|
June 30, 2020
|
December 31, 2019
|
Installment
note payable to bank; interest rate of 5.46%, due in monthly
installments of $4,364, including interest, with final payment in
January 2020
|
$-
|
$4,000
|
Installment
note payable to bank; interest rate of 5.93%, due in monthly
installments of $1,425, including interest, with final payment in
February 2020
|
-
|
3,000
|
Installment
note payable to bank; interest rate of 5.56%, due in monthly
installments of $2,925, including interest, with final payment in
June 2020
|
-
|
17,000
|
Installment
note payable to bank; interest rate of 4.87%, due in quarterly
installments of $4,785, including interest, with final payment in
October 2020
|
9,500
|
18,000
|
Installment
note payable to bank; interest rate of 5.31%, due in quarterly
installments of $6,157, including interest, with final payment in
January 2021
|
18,000
|
30,000
|
Installment
note payable to bank; interest rate of 6.33%, due in quarterly
installments of $5,805, including interest, with final payment in
January 2021
|
17,000
|
28,000
|
Installment
note payable to bank; interest rate of 6.66%, due in quarterly
installments of $2,774, including interest, with final payment in
January 2021
|
8,000
|
13,000
|
Installment
note payable to bank; interest rate of 5.33%, due in monthly
installments of $582, including interest, with final payment in
August 2021
|
8,000
|
11,000
|
Installment
note payable to bank; interest rate of 4.14%, due in monthly
installments of $705, including interest, with final payment in
August 2024
|
32,500
|
36,000
|
|
$93,000
|
$160,000
|
The
notes are secured by specific equipment with a carrying value of
approximately $133,000 and are nonrecourse liabilities of the
Partnership. As such, the notes do not contain any financial debt
covenants with which we must comply on either an annual or
quarterly basis. Aggregate approximate maturities of notes payable
for each of the periods subsequent to June 30, 2020 are as
follows:
|
Amount
|
Six months ended
December 31, 2020
|
$45,000
|
Year
ended December 31, 2021
|
26,000
|
Year
ended December 31, 2022
|
8,000
|
Year
ended December 31, 2023
|
8,000
|
Year
ended December 31, 2024
|
6,000
|
|
$93,000
|
The
Partnership is scheduled to terminate on December 31, 2023. CCC
will assume the obligation and rights to the remaining notes
payable and its related secured equipment as described above
through their termination.
11
6. Supplemental Cash Flow Information
No
interest or principal on notes payable was paid by the Partnership
during 2020 and 2019 because direct payment was made by lessee to
the bank in lieu of collection of lease income and payment of
interest and principal by the Partnership.
Other
noncash activities included in the determination of net loss are as
follows:
Six months ended June 30,
|
2020
|
2019
|
Lease revenue net
of interest expense on notes payable realized as a result of direct
payment of principal by lessee to bank
|
$68,000
|
$207,000
|
During
the six months ended June 30, 2020 and 2019, the Partnership
wrote-off fully amortized acquisition and finance fees of
approximately $14,000 and $1,000, respectively.
7. Commitments and Contingencies
COVID-19 Pandemic
The
amount of revenue recognized and the pattern of revenue recognition
may be impacted by COVID-19. Some of the business sectors that
we service such as education centers, medical facilities, payroll
administrators, manufacturing and transportation, we may need to
account for returns and refund liabilities. The pattern of revenue
recognition may change for delays in rendering
services.
In
periods ended subsequent to the outbreak of COVID-19, the
impact on expected credit losses and future cash flow projections
used in impairment testing will need to be considered.
The Company continues to evaluate whether adjustments to the
financial statements are required or whether additional disclosures
are necessary. In our leasing business, the Company is always
subject to credit losses as it relates to a customer’s
ability to make timely rental payments. The impact of COVID-19 may
contribute to risk of non-performance, where a customer may
experience financial difficulty and may delay in making timely
payments.
The Company recognizes impairment of receivables and loans when
losses are incurred, which is when it is probable that an entity
will be unable to collect all amounts due according to the
contractual terms of the arrangement. Impairment is measured based
on the present value of expected future cash flows discounted at
the receivable’s or loans effective interest rate, except
that, as a practical expedient, impairment can be measured based on
a receivable’s or loans’ observable market price or the
fair value of the underlying collateral.
The Company believes its estimate of expected losses have been
recognized based on historical experience, current conditions, and
reasonable forecasts. The impacts of COVID-19 may necessitate
additional adjustments in future forecasts of expected
losses.
The Company has not yet adopted ASC Topic
326, Credit
Lossesbut is subject to ASC 310
(see Note 2, Recent Accounting Pronouncements Not Yet Adopted). ASC
310-10 provides general guidance for receivables and notes that
receivables arise from credit sales, loans, or other
transactions.
Although
the Partnership cannot estimate the length or gravity of the impact
of the COVID-19 outbreak at this time, if the pandemic continues,
it may have a material adverse effect on the Partnership results of
future operations, financial position, and liquidity in fiscal year
2020 and beyond.
12
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of
the sale proceeds was approximately $77,000. As of August 14,
2020, the Partnership had received approximately $62,000 of the
approximate $77,000 sale proceeds and has recorded a reserve of
$13,000 against the outstanding receivables. On April 3, 2015
Medshare was obligated to make payment in full and failed to do
so. As a result, Medshare defaulted on its purchase agreement
with CCC and was issued a demand letter for full payment of the
equipment. On June 25, 2015, Medshare filed a lawsuit in
Texas state court for breach of contract (“State
Suit”). On June 26, 2015, Commonwealth filed a lawsuit
in the Northern District of Texas against Medshare seeking payment
in full and/or return of the Equipment and
damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,
2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $23,000 and is to be applied against the net Medshare
receivable of approximately $18,000 as of the settlement date. The
remaining $5,000 will be applied against the $12,000 reserve and
recorded as a bad debt recovery. As of August 14, 2020, the
Partnership received approximately $9,000 of the approximate
$23,000 settlement agreement which was applied against the net
Medshare receivable of approximately $18,000 as of the settlement
date. As Defendant defaulted on settlement agreement, CCC
sought and obtained consent judgment from U.S. District Court for
Northern District of Texas, Dallas Division on July 27, 2017 in the
amount of $1.5 million, less $450,000 previously paid plus $6,757
in attorney fees, both the Defendant and Cleary being jointly and
severally liable for the judgment amount. The court also
vacated the September 21, 2016 settlement
dismissal.
On July
27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of the Defendant filed for a TRO in the U.S.
District Court of the Northern District of Texas, Dallas Division.
Included with the TRO filing was a request for appointment of
trustee for operation of Defendant, which was granted and the case
converted to Chapter 7. On December 18, 2018 the Bankruptcy Court
entered final order and issued its last payment to CCC in March
2019 of approximately $43,000, of which the Partnership’s
share was approximately $700. The Medshare Bankruptcy matter
is now closed. Although the trustee’s final distribution to
Commonwealth did not fully satisfy the judgment, recovery may
still be pursued directly against Cleary. As such, management
believes that the foregoing will not result in any adverse
financial impact on the Funds, but no assurance can be provided
until the proceedings are resolved.
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however, on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had already reallocated back approximately
$151,225 of the $208,000 (in allegedly misallocated expenses)
to the affected funds, which was fully documented, as good faith
payments for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 87 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. All the
requested or allowed briefs have been filed with the SEC. The
SEC upheld FINRA’s order on February 7, 2020 to bar, but
eliminated FINRA’s proposed fine. Ms.
Springsteen-Abbott has filed a Petition for Review in the United
States Court of Appeals for the District of Columbia Circuit to
review a final order entered against her by the U.S. Securities and
Exchange Commission. As the SEC eliminated FINRA’s fine
completely, Management is even more confident that regardless of
final resolution, it will not result in any material adverse
financial impact to the Funds, although a final assurance cannot be
provided until the legal matter is resolved. That appeal is
pending as of August 14, 2020.
13
Item 2: Management’s Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This
section, as well as other portions of this document, includes
certain forward-looking statements about our business and our
prospects, tax treatment of certain transactions and accounting
matters, sales of securities, expenses, cash flows, distributions,
investments and operating and capital requirements. Such
forward-looking statements include, but are not limited to:
acquisition policies of our general partner; the nature of present
and future leases; provisions for uncollectible accounts; the
strength and sustainability of the U.S. economy; the continued
difficulties in the credit markets and their impact on the economy
in general; and the level of future cash flow, debt levels,
revenues, operating expenses, amortization and depreciation
expenses. You can identify those statements by the use of words
such as “could,” “should,”
“would,” “may,” “will,”
“project,” “believe,”
“anticipate,” “expect,” “plan,”
“estimate,” “forecast,”
“potential,” “intend,”
“continue” and “contemplate,” as well as
similar words and expressions.
Actual
results may differ materially from those in any forward-looking
statements because any such statements involve risks and
uncertainties and are subject to change based upon various
important factors, including, but not limited to, nationwide
economic, financial, political and regulatory conditions; the
health of debt and equity markets, including interest rates and
credit quality; the level and nature of spending in the
information, medical and telecommunications technologies markets;
and the effect of competitive financing alternatives and lease
pricing.
Readers
are also directed to other risks and uncertainties discussed in
other documents we file with the SEC, including, without
limitation, those discussed in Item 1A. “Risk Factors”
of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 filed with the SEC. We undertake no obligation to
update or revise any forward-looking information, whether as a
result of new information, future developments or
otherwise.
INDUSTRY OVERVIEW
The
Equipment Leasing and Finance Association’s (ELFA) Monthly
Leasing and Finance Index (MLFI-25), which reports economic
activity from 25 companies representing a cross section of the $900
billion equipment finance sector, showed their overall new business
volume for June was $8.9 billion, down 10 % year-over-year from new
business volume in June 2019. Volume was up 33 % month-to-month
from $6.7 billion in May. Year-to-date, cumulative new business
volume was down 0.5 % compared to 2019.
Receivables
over 30 days were 2.60 %, down from 4.30 % the previous month and
up from 1.70 % the same period in 2019. Charge-offs were 0.71 %, up
from 0.61 % the previous month, and up from 0.33 % in the
year-earlier period.
Credit
approvals totaled 71.5 %, up from 71.0 % in May. Total headcount
for equipment finance companies was down 1.9 %
year-over-year.
Separately,
the Equipment Leasing & Finance Foundation’s Monthly
Confidence Index (MCI-EFI) in July is 45.3, steady with the May
index of 45.8.
ELFA
President and CEO Ralph Petta said, “The month of
June’s pickup in new business volume is welcome news, but it
remains to be seen whether this trend continues as the summer
progresses. The economy is soft, too many employees are out of work
as a result, and many states are struggling with the decision to
re-open their economies. Depending on the specific sectors
they support, some ELFA member companies report robust
originations, while others are challenged putting new deals on
their books.”
CRITICAL ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of
operations are based upon our financial statements which have been
prepared in accordance with generally accepted accounting
principles in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses.
We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We
believe that our critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
financial statements. See Note 2 to our condensed financial
statements included herein for a discussion related to recent
accounting pronouncements.
14
LEASE INCOME RECEIVABLE
Lease
income receivable includes current lease income receivable net of
allowances for uncollectible amounts, if any. The Partnership
monitors lease income receivable to ensure timely and accurate
payment by lessees. The Partnership’s Lease Relations
department is responsible for monitoring lease income receivable
and, as necessary, resolving outstanding invoices.
The
Partnership reviews a customer’s credit history before
extending credit. When the analysis indicates that the probability
of full collection is unlikely, the Partnership may establish an
allowance for uncollectible lease income receivable based upon the
credit risk of specific customers, historical trends and other
information. The Partnership writes off its lease income receivable
when it determines that it is uncollectible and all economically
sensible means of recovery have been exhausted.
REVENUE RECOGNITION
The
Partnership is principally engaged in business of leasing
equipment. Ancillary to the Partnership’s principal equipment
leasing business, the Partnership also sells certain equipment and
may offer certain services to support its customers.
The
Partnership’s lease transactions are principally accounted
for under Topic 842 on January 1, 2019. Prior to Topic 842, the
Partnership accounted for these transactions under Topic 840,
Leases (“Topic 840”). Lease revenue includes revenue
generated from leasing equipment to customers, including re-rent
revenue, and is recognized as either on a straight line basis or
using the effective interest method over the length of the lease
contract, if such lease is either an operating lease or finance
lease, respectively.
The
Partnership’s sale of equipment along with certain services
provided to customers is recognized under ASC Topic 606, Revenue
from Contracts with Customers, (“Topic 606”), which was
adopted on January 1, 2018. Prior to adoption of Topic 606, the
Partnership recognized these transactions under ASC Topic 605,
Revenue Recognized, and (“Topic 605”). The Partnership
recognizes revenue when it satisfies a performance obligation by
transferring control over a product or service to a customer. The
amount of revenue recognized reflects the consideration the
Partnership expects to be entitled to in exchange for such products
or services.
Through
June 30, 2020, the Partnership’s lease portfolio consisted of
operating leases and finance leases. For operating leases, lease
revenue is recognized on a straight-line basis in accordance with
the terms of the lease agreement. Finance lease interest income is
recorded over the term of the lease using the effective interest
method.
Upon
the end of the lease term, if the lessee has not met the return
conditions as set out in the lease, the Partnership is entitled in
certain cases to additional compensation from the lessee. The
Partnership’s accounting policy for recording such payments
is to treat them as revenue.
Gains
or losses from sales of leased and off-lease equipment are recorded
on a net basis in the Partnership’s Statement of Operations.
Gains from the termination of leases are recognized when the lease
is modified and terminated concurrently. Our leases do not contain
any step-rent provisions or escalation clauses nor are lease
revenues adjusted based on any index.
Partnership’s
accounting policy for sales and property taxes collected from the
lessees are recorded in the current period as gross revenues and
expenses.
LONG-LIVED ASSETS
Depreciation
on technology and inventory management equipment for financial
statement purposes is based on the straight-line method estimated
generally over useful lives of two to five years. Once an asset
comes off lease or is released, the Partnership reassesses the
useful life of an asset.
The
Partnership evaluates its long-lived assets when events or
circumstances indicate that the value of the asset may not be
recoverable. The Partnership determines whether impairment exists
by estimating the undiscounted cash flows to be generated by each
asset. If the estimated undiscounted cash flows are less than the
carrying value of the asset then impairment exists. The amount of
the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based
on estimated discounted cash flows to be generated by the asset,
third party appraisals or comparable sales of similar assets, as
applicable, based on asset type.
Residual
values are determined by management and are calculated using
information from both internal and external sources, as well as
other economic indicators.
15
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our
primary sources of cash for the six months ended June 30, 2020 were
cash provided by operating activities of approximately $35,000 and
net proceeds from the sale of equipment of approximately $107,000.
Our primary sources of cash for the six months ended June 30, 2019
were cash provided by operating activities of approximately $2 and
net proceeds from the sale of equipment of approximately
$125.
Our
primary use of cash for the six months ended June 30, 2020 was cash
used in investing activities for the purchase of finance leases of
approximately $20,000, equipment acquisition fees paid to the
general partner of approximately $1,000 and partnership redemptions
of approximately $8,000. There were no primary uses of cash for the
six months ended June 30, 2019.
Cash
was provided by operating activities for the six months ended June
30, 2020 of approximately $35,000, which includes a net loss of
approximately $10,000, depreciation and amortization expenses of
approximately $192,000 and gain on sale of equipment of
approximately $47,000. Other noncash activities included in the
determination of net income include direct payments to banks by
lessees of approximately $68,000. Cash was provided by operating
activities for the six months ended June 30, 2019 of approximately
$2, which includes a net loss of approximately $112,000,
depreciation and amortization expenses of approximately $280,000
and gain on sale of equipment of approximately $125. Other noncash
activities included in the determination of net income include
direct payments to banks by lessees of approximately
$207,000.
When we
acquire equipment for the equipment portfolio, operating expenses
may increase, but because of our investment strategy of leasing
equipment primarily through triple-net leases, we avoid operating
expenses related to equipment maintenance or taxes.
CCC, on
our behalf and on behalf of other affiliated partnerships, acquires
equipment subject to associated debt obligations and lease revenue
and allocates a participation in the cost, debt and lease revenue
to the various partnerships based on certain risk
factors.
We
consider cash equivalents to be highly liquid investments with an
original maturity of 90 days or less.
At June
30, 2020, cash and cash equivalents were held in one account
maintained at one financial institution with an aggregate balance
of approximately $121,000. Bank accounts are federally insured up
to $250,000 by the FDIC. At June 30, 2020, the total cash balance
was as follows:
At June 30, 2020
|
Balance
|
Total
bank balance
|
$121,000
|
FDIC
insured
|
(121,000)
|
Uninsured
amount
|
$-
|
The
Partnership believes it mitigates the risk of holding uninsured
deposits by only depositing funds with major financial
institutions. The Partnership has not experienced any losses in our
accounts, and believes it is not exposed to any significant credit
risk. The amounts in such accounts will fluctuate throughout 2020
due to many factors, including cash receipts, equipment
acquisitions, interest rates and distributions to limited
partners.
The
Partnership’s investment strategy of acquiring equipment and
generally leasing it under triple-net leases to operators who
generally meet specified financial standards minimizes our
operating expenses. As of June 30, 2020, the Partnership had future
minimum rentals on non-cancelable operating leases of approximately
$178,000 for the balance of the year ending December 31, 2020 and
approximately $59,000 thereafter.
As of
June 30, 2020, our non-recourse debt was approximately $93,000 with
interest rates ranging from 4.14% to 6.66% and will be payable
through August 2024. The Partnership is scheduled to terminate on
December 31, 2023. CCC will assume the obligation and rights to the
remaining notes payable and its related secured equipment through
their termination.
The
Partnership was originally scheduled to end its operational phase
on December 31, 2018. During the year ended December 31, 2018, the
operational phase was officially extended to December 31, 2021
through an investor proxy vote. The Partnership is expected to
terminate on December 31, 2023.
16
RESULTS OF OPERATIONS
Three months ended June 30, 2020 compared to three months ended
June 30, 2019
Lease Revenue
Lease
revenue decreased to approximately $180,000 for the three months
ended June 30, 2020, from approximately $185,000 for the three
months ended June 30, 2019. The Partnership had 20 and 33 active
operating leases for the three months ended June 30, 2020 and 2019,
respectively. This decrease in lease
revenue is primarily due to a greater number of lease agreements
ending versus new lease agreements being acquired. Management
expects to add new leases to the Partnership’s portfolio
throughout 2020, primarily through debt
financing.
Sale of Equipment
For the
three months ended June 30, 2020, the Partnership sold fully
depreciated equipment with a net book value of approximately
$13,000 for a net gain of approximately $13,000. This compares to
the three months ended June 30, 2019, when the Partnership sold
fully depreciated equipment with a net book value of approximately
$0 for a net gain of approximately $125.
Operating Expenses
Our
operating expenses, excluding depreciation, primarily consist of
accounting and legal fees, outside service fees and reimbursement
of expenses to CCC for administration and operation of the
Partnership. These expenses increased to approximately $92,000 for
the three months ended June 30, 2020, from approximately $73,000
for the three months ended June 30, 2019. This increase is
primarily attributable to an increase in legal fees of
approximately $12,000 associated with the FINRA matter (see Item 1.
Legal Proceedings), an increase in Other LP expenses charged by CCC for the administration of the
Partnership of approximately $7,000, an increase in outside
office services of approximately $3,000 and an increase in office
relocation expenses of approximately $3,000, partially offset by a
decrease in other taxes of approximately $3,000 and a decrease in
accounting fees of approximately $2,000.
Equipment Management Fees
We pay
an equipment management fee to our general partner for managing our
equipment portfolio. The equipment management fee is approximately
5% of the gross lease revenue attributable to equipment that is
subject to operating leases and approximately 2% of the gross lease
revenue attributable to equipment that is subject to finance
leases. The equipment management fee decreased to approximately
$6,000 for the three months ended June 30, 2020 from approximately
$9,000 for the three months ended June 30, 2019, which is
consistent with the decrease in lease revenue.
Depreciation and Amortization Expense
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $93,000 for the three months ended June
30, 2020, from approximately $139,000 for the three months ended
June 30, 2019. This decrease was due to the higher frequency in the
termination of leases and equipment being fully depreciated as
compared to the acquisition of new leases for the three months
ended June 30, 2020.
Net Income/Loss
For the
three months ended June 30, 2020, we recognized revenue of
approximately $215,000 and expenses of approximately $198,000
resulting in net income of approximately $17,000. For the three
months ended June 30, 2019, we recognized revenue of approximately
$195,000 and expenses of approximately $236,000 resulting in a net
loss of approximately $41,000. This change to net income is due to
the changes in revenue and expenses as described
above.
17
Six months ended June 30, 2020 compared to six months ended June
30, 2019
Lease Revenue
Lease
revenue decreased to approximately $341,000 for the six months
ended June 30, 2020, from approximately $373,000 for the six months
ended June 30, 2019. The Partnership had 33 and 34 active operating
leases for the six months ended June 30, 2020 and 2019,
respectively. This decrease in lease
revenue is primarily due to a greater number of lease agreements
ending versus new lease agreements being acquired. Management
expects to add new leases to the Partnership’s portfolio
throughout 2020, primarily through debt
financing.
Sale of Equipment
On
January 31, 2020, the Partnership entered into a Purchase and Sale
Agreement, (the “Purchase Agreement”) with Cummins,
Inc. (the “buyer”) to sell to the Buyer approximately
1,475 items of equipment that the Buyer previously leased from the
Company. The General Partner allocated to the Partnership its share
of approximately $180,000, for the sale price of primarily, High
End Sun Servers and Small IBM Servers and recorded a gain on sale
of equipment of approximately $34,000.
The
Partnership disposed of and sold other equipment to various
customers during the 2020 quarter. For the six months ended June
30, 2020, the Partnership sold equipment to other customers besides
Cummins with a total net book value of $13,000 and net gain of
approximately $13,000 (for total net book value of approximately
$61,000 and total net gain of approximately $47,000, after adding
for Cummins gain). This compared to the six months ended June 30,
2019, the Partnership sold equipment with net book value of
approximately $0 for a net gain of approximately $125.
Operating Expenses
Our
operating expenses, excluding depreciation, primarily consist of
accounting and legal fees, outside service fees and reimbursement
of expenses to CCC for administration and operation of the
Partnership. These expenses increased to approximately $198,000 for
the six months ended June 30, 2020, from approximately $177,000 for
the six months ended June 30, 2019. This increase is primarily
attributable to an increase in accounting fees of approximately
$10,000, an increase in legal fees associated with the FINRA matter
(see Item 1. Legal Proceedings) of approximately $5,000, an
increase in outside office services of approximately $3,000 and an
increase in office relocation services of approximately
$3,000.
Equipment Management Fees
We pay
an equipment management fee to our general partner for managing our
equipment portfolio. The equipment management fee is approximately
5% of the gross lease revenue attributable to equipment that is
subject to operating leases and approximately 2% of the gross lease
revenue attributable to equipment that is subject to finance
leases. The equipment management fee decreased to approximately
$14,000 for the six months ended June 30, 2020 from approximately
$19,000 for the six months ended June 30, 2019, which is consistent
with the lease revenue.
Depreciation and Amortization Expense
Depreciation
and amortization expenses consist of depreciation on equipment and
amortization of equipment acquisition fees. These expenses
decreased to approximately $192,000 for the six months ended June
30, 2020, from approximately $280,000 for the six months ended June
30, 2019. This decrease was due to the higher frequency in the
termination of leases and equipment being fully depreciated as
compared to the acquisition of new leases for the six months ended
June 30, 2020.
Net Loss
For the
six months ended June 30, 2020, we recognized revenue of
approximately $421,000 and expenses of approximately $431,000,
resulting in a net loss of approximately $10,000. For the six
months ended June 30, 2019, we recognized revenue of approximately
$391,000 expenses of approximately $503,000, resulting in a net
loss of approximately $112,000. This change in net loss is due to
the changes in revenue and expenses as described
above.
18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
N/A
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our
management, under the supervision and with the participation of the
General Partner’s Chief Executive Officer and Principal
Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures related to our reporting and
disclosure obligations as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on such evaluation, the
General Partner’s Chief Executive Officer and Principal
Financial Officer have concluded that, as of June 30, 2020, our
disclosure controls and procedures were not effective due to the
presence of a material weakness in internal control over financial
reporting.
A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will
not be prevented or detected on a timely basis. In evaluating the
effectiveness of our internal control over financial reporting, our
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control – Integrated
Framework (2013) and SEC guidance on conducting such assessments.
Management’s assessment included an evaluation of the design
of our internal control over financial reporting and testing of the
operational effectiveness of these controls. Based on this
assessment, management has concluded that as of June 30, 2020, our
internal control over financial reporting was not effective to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting
principles. The matters involving internal controls and procedures
that our management considered to be material weaknesses under the
standards of the Public Company Accounting Oversight Board were:
(i) ineffective controls over period end financial disclosure and
reporting processes. The aforementioned material weaknesses were
identified by our principal financial officer and principal
accounting officer, in connection with the review of our financial
statements as of June 30, 2020.
Remediation of Material Weakness
In an
effort to remediate the identified material weaknesses and other
deficiencies and enhance our internal controls, we have initiated,
or plan to initiate, the following measure:
1.
We plan to
incorporate a procedure within our written policies and procedures
to require for nonrecurring, referenced as “one-off”
journal entries to be reviewed and signed-off by two senior
accounting officers to ensure appropriate transactions are recorded
as intended to be reported for financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles.
We have started to implement this procedure as part of our monthly
close process and anticipate that this procedure will be
incorporated in our written policies and procedures by the end of
fiscal year 2020. The material weakness will not be considered
remediated, however, until the applicable controls operate for a
sufficient period of time and management has concluded, through
testing, that these controls are operating effectively. We expect
that the remediation of this material weakness will be completed
prior to the end of fiscal year 2020.
Changes in Internal Control over Financial Reporting:
There
were no other changes in our internal control over financial
reporting during the quarter ending June 30, 2020, that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
19
Part II: OTHER INFORMATION
Item 1.
Legal
Proceedings
Medshare
In
January 2015, CCC, on behalf of the Funds, entered into a Purchase
Agreement (“Purchase Agreement”) for the sale of the
equipment to Medshare Technologies (“Medshare”) for
approximately $3,400,000. The Partnership’s share of
the sale proceeds was approximately $77,000. As of August 14,
2020, the Partnership had received approximately $62,000 of the
approximate $77,000 sale proceeds and has recorded a reserve of
$13,000 against the outstanding receivables. On April 3, 2015
Medshare was obligated to make payment in full and failed to do
so. As a result, Medshare defaulted on its purchase agreement
with CCC and was issued a demand letter for full payment of the
equipment. On June 25, 2015, Medshare filed a lawsuit in
Texas state court for breach of contract (“State
Suit”). On June 26, 2015, Commonwealth filed a lawsuit
in the Northern District of Texas against Medshare seeking payment
in full and/or return of the Equipment and
damages.
In July
2016, CCC, on behalf of the Funds, entered into a $1,400,000
binding Settlement Agreement (“Settlement Agreement”)
with Medshare and its principal owner, Chris Cleary (collectively
referred to as “Defendants”), who are held jointly and
severally liable for the entire settlement. On August 2,
2016, the Defendants made payment to CCC of an initial $200,000 to
be followed by 24 structured monthly payments of approximately
$50,000 per month to begin no later than September 15, 2016.
The Partnership’s share of the Settlement Agreement is
approximately $23,000 and is to be applied against the net Medshare
receivable of approximately $18,000 as of the settlement date. The
remaining $5,000 will be applied against the $12,000 reserve and
recorded as a bad debt recovery. As of August 14, 2020, the
Partnership received approximately $9,000 of the approximate
$23,000 settlement agreement which was applied against the net
Medshare receivable of approximately $18,000 as of the settlement
date. As Defendant defaulted on settlement agreement, CCC
sought and obtained consent judgment from U.S. District Court for
Northern District of Texas, Dallas Division on July 27, 2017 in the
amount of $1.5 million, less $450,000 previously paid plus $6,757
in attorney fees, both the Defendant and Cleary being jointly and
severally liable for the judgment amount. The court also
vacated the September 21, 2016 settlement
dismissal.
On July
27, 2017 Defendant filed Chapter 11 in Northern District of Texas
Dallas Division. On July 26, 2017 Legacy Texas Bank, a
secured creditor of the Defendant filed for a TRO in the U.S.
District Court of the Northern District of Texas, Dallas Division.
Included with the TRO filing was a request for appointment of
trustee for operation of Defendant, which was granted and the case
converted to Chapter 7. On December 18, 2018 the Bankruptcy Court
entered final order and issued its last payment to CCC in March
2019 of approximately $43,000, of which the Partnership’s
share was approximately $700. The Medshare Bankruptcy matter
is now closed. Although the trustee’s final distribution to
Commonwealth did not fully satisfy the judgment, recovery may
still be pursued directly against Cleary. As such, management
believes that the foregoing will not result in any adverse
financial impact on the Funds, but no assurance can be provided
until the proceedings are resolved.
20
FINRA
On May 3, 2013, the FINRA Department of Enforcement filed a
complaint naming Commonwealth Capital Securities Corp.
(“CCSC”) and the owner of the firm, Kimberly
Springsteen-Abbott, as respondents; however, on October 22, 2013,
FINRA filed an amended complaint that dropped the allegations
against CCSC and reduced the scope of the allegations against Ms.
Springsteen-Abbott. The sole remaining charge was that Ms.
Springsteen-Abbott had approved the misallocation of some expenses
to certain Funds. Management believes that the expenses at
issue include amounts that were proper and that were properly
allocated to Funds, and also identified a smaller number of
expenses that had been allocated in error, but were adjusted and
repaid to the affected Funds when they were identified in
2012. During the period in question, Commonwealth Capital
Corp. (“CCC”) and Ms. Springsteen-Abbott provided
important financial support to the Funds, voluntarily absorbed
expenses and voluntarily waived fees in amounts aggregating in
excess of any questioned allocations. A Hearing Panel ruled
on March 30, 2015, that Ms. Springsteen-Abbott should be barred
from the securities industry because the Panel concluded that she
allegedly misallocated approximately $208,000 of expenses involving
certain Funds over the course of three years. As such,
management had already reallocated back approximately
$151,225 of the $208,000 (in allegedly misallocated expenses)
to the affected funds, which was fully documented, as good faith
payments for the benefit of those Income Funds.
The decision of the Hearing Panel was stayed when it was appealed
to FINRA's National Adjudicatory Council (the “NAC”)
pursuant to FINRA Rule 9311. The NAC issued a decision that
upheld the lower panel’s ruling and the bar took effect on
August 23, 2016. Ms. Springsteen-Abbott appealed the
NAC’s decision to the U.S. Securities and Exchange Commission
(the “SEC”). On March 31, 2017, the SEC
criticized that decision as so flawed that the SEC could not even
review it, and remanded the matter back to FINRA for further
consideration consistent with the SEC’s remand, but did not
suggest any view as to a particular outcome.
On July 21, 2017, FINRA reduced the list of 1,840 items totaling
$208,000 to a remaining list of 87 items totaling $36,226 (which
includes approximately $30,000 of continuing education expenses for
personnel providing services to the Funds), and reduced the
proposed fine from $100,000 to $50,000, but reaffirmed its position
on the bar from the securities industry. Respondents promptly
appealed FINRA’s revised ruling to the SEC. All the
requested or allowed briefs have been filed with the SEC. The
SEC upheld FINRA’s order on February 7, 2020 to bar, but
eliminated FINRA’s proposed fine. Ms.
Springsteen-Abbott has filed a Petition for Review in the United
States Court of Appeals for the District of Columbia Circuit to
review a final order entered against her by the U.S. Securities and
Exchange Commission. As the SEC eliminated FINRA’s fine
completely, Management is even more confident that regardless of
final resolution, it will not result in any material adverse
financial impact to the Funds, although a final assurance cannot be
provided until the legal matter is resolved. That appeal is
pending as of August 14, 2020.
21
Item
1A. Risk
Factors
COVID-19 Pandemic
The
amount of revenue recognized and the pattern of revenue recognition
may be impacted by COVID-19. Some of the business sectors that
we service such as education centers, medical facilities, payroll
administrators, manufacturing and transportation, we may need to
account for returns and refund liabilities. The pattern of revenue
recognition may change for delays in rendering
services.
In
periods ended subsequent to the outbreak of COVID-19, the
impact on expected credit losses and future cash flow projections
used in impairment testing will need to be considered.
The Company continues to evaluate whether adjustments to the
financial statements are required or whether additional disclosures
are necessary. In our leasing business, the Company is always
subject to credit losses as it relates to a customer’s
ability to make timely rental payments. The impact of COVID-19 may
contribute to risk of non-performance, where a customer may
experience financial difficulty and may delay in making timely
payments.
The Company recognizes impairment of receivables and loans when
losses are incurred, which is when it is probable that an entity
will be unable to collect all amounts due according to the
contractual terms of the arrangement. Impairment is measured based
on the present value of expected future cash flows discounted at
the receivable’s or loans effective interest rate, except
that, as a practical expedient, impairment can be measured based on
a receivable’s or loans’ observable market price or the
fair value of the underlying collateral.
The Company believes its estimate of expected losses have been
recognized based on historical experience, current conditions, and
reasonable forecasts. The impacts of COVID-19 may necessitate
additional adjustments in future forecasts of expected
losses.
The Company has not yet adopted ASC Topic
326, Credit
Lossesbut is subject to ASC 310
(see Note 2, Recent Accounting Pronouncements Not Yet Adopted). ASC
310-10 provides general guidance for receivables and notes that
receivables arise from credit sales, loans, or other
transactions.
Although
the Partnership cannot estimate the length or gravity of the impact
of the COVID-19 outbreak at this time, if the pandemic continues,
it may have a material adverse effect on the Partnership results of
future operations, financial position, and liquidity in fiscal year
2020 and beyond.
Material Weakness
Failure
to maintain effective systems of internal control over financial
reporting and disclosure controls and procedures could result in
additional costs being incurred for remediation and cause a loss of
confidence in our financial reporting.
Effective
internal control over financial reporting is necessary for us to
provide accurate financial information. We previously identified a
material weakness in our internal controls over financial reporting
as of June 30, 2020. We have concluded that our internal controls
over financial reporting were not effective as of June 30, 2020 due
to the existence of material weaknesses in our monthly close for
not properly reviewing certain journal entries that had an impact
on the internal controls over financial reporting.
We have
started to implement this procedure as part of our monthly close
process and anticipate that this procedure will be incorporated in
our written policies and procedures by the end of fiscal year 2020.
The material weakness will not be considered remediated, however,
until the applicable controls operate for a sufficient period of
time and management has concluded, through testing, that these
controls are operating effectively. We expect that the remediation
of this material weakness will be completed prior to the end of
fiscal year 2020.
If our
remediation measures are insufficient to address the identified
deficiencies, or if additional deficiencies in our internal control
over financial reporting are discovered or occur in the future, our
financial statements may contain material misstatements and we
could be required to restate our financial results. Moreover,
because of the inherent limitations of any control system, material
misstatements due to error or fraud may not be prevented or
detected on a timely basis, or at all. If we are unable to provide
reliable and timely financial reports in the future, our business
and reputation may be further harmed. Failures in internal controls
may negatively affect investor confidence in our management and the
accuracy of our financial statements and disclosures, or result in
adverse publicity and concerns from investors, any of which could
have a negative effect, subject us to regulatory investigations and
penalties and/or shareholder litigation, and materially adversely
impact our business and financial condition.
22
Item 2.
Unregistered Sales of Equity
Securities and Use of Proceeds
N/A
Item 3.
Defaults Upon Senior
Securities
N/A
Item 4.
Mine Safety
Disclosures
N/A
Item 5.
Other
Information
NONE
Item 6.
Exhibits
23
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
COMMONWEALTH
INCOME & GROWTH FUND VI
|
|
BY:
COMMONWEALTH INCOME & GROWTH FUND, INC., General
Partner
|
August 14, 2020
|
By: /s/ Kimberly A. Springsteen-Abbott
|
Date
|
Kimberly
A. Springsteen-Abbott
|
|
Chief
Executive Officer And Principal Financial Officer
Commonwealth
Income & Growth Fund, Inc.
|
|
|
|
|
August 14, 2020
Date
|
By: /s/ Karl
A. Hazen
Karl A. Hazen
SEC Reporting Officer
|
24